Plaintiffs’ lawyers have recently taken aim at REITS and other owners and managers of multi-family property portfolios - filing class action lawsuits seeking damages and to invalidate late fee charges imposed under residential leases. In September 2014, Equity Residential was sued by tenants in East Palo Alto claiming that a $50 late fee was an illegal penalty. Last week, on May 11, Equity Residential was hit again with a second class action asserting similar claims in federal court in San Diego. Plaintiffs in these cases attack the standard residential late fee on the theory that the fee exceeds the marginal interest that might have accrued during the time the tenant failed to pay his rent in a timely manner. Plaintiffs also challenge an alleged “failure to timely advise tenants” that a late fee has been charged and the “practice of charging tenants additional fees for the late payment of fees, rather than rent,” contending both are unfair business practices prohibited by law.
These class action lawsuits argue that late fee provisions in residential lease forms are disguised penalties that are illegal under California law, relying on a 2004 case, Orozco v. Casimiro, 121 Cal. App.4th Supp. 7 (2004). Of course, Plaintiffs misread Orzoco v. Casimiro. The case held only that a rent late payment fee must satisfy the general rules applicable to liquidated damages clauses – that is, be impractical to calculate in advance and a reasonable estimate of actual damages.
While Plaintiffs’ legal theories are novel and we predict unlikely to be successful in the courts, residential and multi-family property owners and managers should consider whether their late fee provisions in apartment and other residential lease forms meet the applicable standard for liquidated damages clauses under California law and whether their late fee practices could draw the attention of aggressive class action plaintiffs’ lawyers. The time, costs and expenses that are and could be incurred in addressing late payment defaults or other lease violations should be considered. Additionally, consider evaluating your billing statements and their descriptions of late fees and other charges to ensure those descriptions are consistent with lease terms and don’t create ambiguities that can be exploited by plaintiffs’ lawyers.
Chris Chavez, Senior Counsel in Orrick’s Real Estate group and Nancy Harris, Of Counsel and a member of Orrick’s Class Action Strike Team, are available to assist and advise you on how to assess your lease fee terms and billing practices to mitigate the risk from these aggressive class action lawyers.
Orrick's Real Estate group advises the leading international investment funds, foreign investors, real estate advisors, developers, public and private pension funds, REITs, investment banks and institutional lenders in all phases of real estate investment, financing, development, leasing and operations across the United States with a particular focus on complex transactions including joint ventures, acquisitions and dispositions of large real estate portfolios, developments and sophisticated finance and distressed debt transactions. In addition, our dedicated litigation team is focused on disputes arising out of real estate investments and counseling on risk avoidance during real estate contract negotiations.